Roles of Management Graduates in Mergers and Acquisitions By Prof. Augustin Amaladas M.Com.,AICWA.,PGDFM.,B.Ed . For IMIS Bhubaneshwar 28/04/08 –at 9.20 AM

Issues related to Mergers and Acquisitions. Direct Tax implications Sales tax implications Foreign Direct investments Method of valuation Anti Trust Act Financing of Mergers and Aquisitions Role of Investment Bankers Accounting of Mergers.

Direct Tax implications

Sales tax implications

Foreign Direct investments

Method of valuation

Anti Trust Act

Financing of Mergers and Aquisitions

Role of Investment Bankers

Accounting of Mergers.

Recent Mergers and Acquisitions HORIZONTAL MERGER As Ford announced the sale of the two British iconic cars to Tata Motors Ltd.for 2.3 billion. Ford acquired Jaguar for $2.5 bn in 1989 and Land Rover for $2.75 bn in 2000 but put them on the market last year after posting losses of $12.6 bn in 2006 - the heaviest in its 103-year history.

HORIZONTAL MERGER

As Ford announced the sale of the two British iconic cars to Tata Motors Ltd.for 2.3 billion.

Ford acquired Jaguar for $2.5 bn in 1989 and Land Rover for $2.75 bn in 2000 but put them on the market last year after posting losses of $12.6 bn in 2006 - the heaviest in its 103-year history.

The Hutch and Vodafone merger Hutchison Essor Indian Company Vodafone(Briton) A Foreign company HTIL( Whampoa group of Li-Ka Shing. Hong Kong A foreign company 67% Takes over Asim Ghosh-12% A.Singh and other companies (Minority) Essor group

Hutchison Essor

Indian Company

INCOME TAX RELATED ISSUES FOR AMALGAMATION CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B) ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO. SHARE HOLDERS HOLDING NOT LESS THAN 3/4 TH IN VALUE OF SHARES OTHER THAN SHARES ALREADY HELD SHOULD BECOME SHARE HOLDERS OF AMALGAMATED COMPANY EX. NO. OF SHARES OF Altd CO. 1,00,000 NO. OF SHARES HELD BY Bltd IN Altd IS 20,000 NOMINAL VALUE OF SHARE IS RS.10 ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 = 60,000 TO BE THE SHARE HOLDES OF B CO. NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHARE HOLDERS

CONDITIONS OF AMALGAMATION UNDER INCOME TAX ACT SEC 2 (1B)

ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO.

SHARE HOLDERS HOLDING NOT LESS THAN 3/4 TH IN VALUE OF SHARES OTHER THAN SHARES ALREADY HELD SHOULD BECOME SHARE HOLDERS OF AMALGAMATED COMPANY

EX. NO. OF SHARES OF Altd CO. 1,00,000

NO. OF SHARES HELD BY Bltd IN Altd IS 20,000

NOMINAL VALUE OF SHARE IS RS.10

ASSUME Altd MERGE WITH Bltd THEN 75% OF 1,00,000- 20,000 = 60,000 TO BE THE SHARE HOLDES OF B CO.

NOTE:SHARE HOLDERS MAY BE EQUITY OR PREFERNCE SHARE HOLDERS

OTHER CONDITIONS THE AMALGAMATED CO. IS AN INDIAN CO. EXCEPTION IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE MERGER AND SUCH FOREIGN CO. TAKEN OVER BY ANOTHER FOREIGN CO. ATLEAST 25% OF THE FOREIGN CO. (BEFORE MERGER) TO BE SHARE HOLDERS OF THE NEW FOREIGN CO. ? WHAT IS THE BENEFIT TO THE AMALGAMATED CO. AMALGAMATING CO.(OLD CO.)

THE AMALGAMATED CO. IS AN INDIAN CO.

EXCEPTION

IF SHARES OF INDIAN CO.HELD BY FOREIGN BEFORE MERGER AND SUCH FOREIGN CO. TAKEN OVER BY ANOTHER FOREIGN CO.

ATLEAST 25% OF THE FOREIGN CO. (BEFORE MERGER) TO BE SHARE HOLDERS OF THE NEW FOREIGN CO.

? WHAT IS THE BENEFIT TO THE AMALGAMATED CO. AMALGAMATING CO.(OLD CO.)

NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY THE TRANSFEROR CO. UNDER SEC 47(VI) OF I.T ACT ? CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND DEPRECIATION SEC 72 A TO BE FULFILLED ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MORE YEARS 75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS BEFORE AMALGAMATION THE AMALGAMATED CO. CONTINUES TO HOLD 3/4 TH OF BOOK VALUE ATLEAST FOR 5 YEARS NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS

NO CAPITAL GAIN ON TRANSFER ON CAPITAL ASSETS BY THE TRANSFEROR CO. UNDER SEC 47(VI) OF I.T ACT

? CAN NEW CO. CARRY FORWAD AND SET OF LOSS AND DEPRECIATION

SEC 72 A TO BE FULFILLED

ACCUMULATED LOSSES REMAIN UNABSORBED FOR 3 OR MORE YEARS

75% OF BOOK VALUE TO BE HELD ATLEAST FOR 2 YEARS BEFORE AMALGAMATION

THE AMALGAMATED CO. CONTINUES TO HOLD 3/4 TH OF BOOK VALUE ATLEAST FOR 5 YEARS

NEW CO. SHOULD CONTINUE FOR ANOTHER 5 YEARS

NEW CO. SHOULD ACHIEVE ATLEAST 50%OF INSTALLED CAPACITY BEFORE END OF 5 YEARS AND SHOULD CONTINUE FOR 5 YEARS

A LTD AMALGAMATES WITH B LTD AS ON 1 st April 2008 NO CAPITAL GAIN TAX & ACCUMULATED LOSSES & UNABSORBED DEPERICIATION CAN BE CARRIED FORWARD DOES NOT ATTRACT CAPITAL GAIN FOR A BUT NO GAIN FOR B NO BENEFIT TO A & B A MERGES WITH B (A GOES OUT) SATISFIES BOTH 2(1B) & 72 A SATISFIES 2(1B) BUT DOES NOT SATISFY 72 A DOES NOT SATISFY SEC 2(1B) & 72 A PARTICULARS

A LTD AMALGAMATES WITH B LTD AS ON 1 st April 2008

? If B merges with A . If B goes out of market who gains under above 3 situations ? If A&B merge with c. what are the tax implication under above situations? . Assume B is a loss making co. Can accumulated losses & unabsorbed depreciations be carried forward and set off by the new company? ? If C is not an Indian co?

? If B merges with A . If B goes out of market who gains under above 3 situations

? If A&B merge with c. what are the tax implication under above situations?

. Assume B is a loss making co. Can accumulated losses & unabsorbed depreciations be carried forward and set off by the new company?

? If C is not an Indian co?

Tax Concession To Share Holders Of Amalgamating Co. No capital gain tax provided, new co. is an Indian co.& Shareholders are acquired everything in shares

No capital gain tax provided, new co. is an Indian co.& Shareholders are acquired everything in shares

EXERCISE 40 70 MARKET PRICE 8 10 P/E RATIO 5 7 EPS 7,500 20,000 NO. OF SHARES 37,500 1,40,000 EAT CO. B CO. A PARTICULARS

Co. A is acquiring co. B. Exchanging one share for every 1.5 shares of B Ltd & P/E ratio will continue even after merger ? Are they better or worse of than they were before in merger ?? A is an Indian co. ? A is a foreign co. ? A merges with T & formed a new co. AT ltd ? What are the tax planning required before & after merger

Co. A is acquiring co. B. Exchanging one share for every 1.5 shares of B Ltd & P/E ratio will continue even after merger

? Are they better or worse of than they were before in merger

?? A is an Indian co.

? A is a foreign co.

? A merges with T & formed a new co. AT ltd

? What are the tax planning required before & after merger

CONCLUSIONS EXCHANGE AT EPS – NO EFFECT ON EPS AFTER MERGER EXCHANGE MORE THAN EPS RATIO – COMPANY WITH LOWER EPS GAINS IF LESS THAN EPS RATIO – COMPANY WITH HIGHER EPS BEFORE MERGER GAINS

EXCHANGE AT EPS – NO EFFECT ON EPS AFTER MERGER

EXCHANGE MORE THAN EPS RATIO – COMPANY WITH LOWER EPS GAINS

IF LESS THAN EPS RATIO – COMPANY WITH HIGHER EPS BEFORE MERGER GAINS

CONCLUSION IF SHARES ARE EXCHANGED BASED ON CURRENT MARKET PRICE PER SHARE , POST MARKET PRICE SHARE INCREASED AT HIGHER RATE THAN EXCHANGED BELOW THIS RATIO Boot strap effect

IF SHARES ARE EXCHANGED BASED ON CURRENT MARKET PRICE PER SHARE , POST MARKET PRICE SHARE INCREASED AT HIGHER RATE THAN EXCHANGED BELOW THIS RATIO

Boot strap effect

CONCLUSION FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES MARKET VALUE AFTER MERGER

FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES MARKET VALUE AFTER MERGER

Conclusion Fulfill section 2(1B) of Income tax act by transferor company Amount to be in the form of shares No cash to be received Foreign Direct investments in selected sector can not exceed 74% by foreign company Fulfill section 72A of the IT act so as to reap the benefit by transferee company Shareholders can not transfer their holdings with in 5 years. Sales tax at the rate of 8% can not be avoided. Set off and carry forward of losses is possible. What are the losses can be carried forward and set off? How many years?

Fulfill section 2(1B) of Income tax act by transferor company

Amount to be in the form of shares

No cash to be received

Foreign Direct investments in selected sector can not exceed 74% by foreign company

Fulfill section 72A of the IT act so as to reap the benefit by transferee company

Shareholders can not transfer their holdings with in 5 years.

Sales tax at the rate of 8% can not be avoided.

Set off and carry forward of losses is possible.

What are the losses can be carried forward and set off? How many years?

Some Facts-USA Companies 1897-1904-horizontal Mergers Monopolistic Market structure Mega merger between US Steel and Carnegie Steel.It also merged with 785 separate firms-75% of Steel production of US. As a result: ???? What happened to Standard Oil?

1897-1904-horizontal Mergers

Monopolistic Market structure

Mega merger between US Steel and Carnegie Steel.It also merged with 785 separate firms-75% of Steel production of US.

As a result: ???? What happened to Standard Oil?

Standard Oil(SO) Broken in to 30 Companies. Some of them are SO of New Jersey named EXXON SO of New York named MOBIL SO of California renamed CHEVRON SO of Indiana renamed AMOCO What is ANTI TRUST Act? What is known in India? HCL was formed?

Broken in to 30 Companies. Some of them are

SO of New Jersey named EXXON

SO of New York named MOBIL

SO of California renamed CHEVRON

SO of Indiana renamed AMOCO

What is ANTI TRUST Act? What is known in India?

HCL was formed?

HCL Hindustan Computers, Hindustan Reprographic, Hindustan Telecommunications and Indian Software Ltd.

Hindustan Computers, Hindustan Reprographic, Hindustan Telecommunications and Indian Software Ltd.

In February 2008, as many as 38 cross-border deals were announced with total value of $2.80 billion, of which 27 were outbound deals with a value of $2.57 billion .In March 2008 it has crossed $10 billion in investment by Indian Companies outside India.

In February 2008, as many as 38 cross-border deals were announced with total value of $2.80 billion, of which 27 were outbound deals with a value of $2.57 billion

.In March 2008 it has crossed $10 billion in investment by Indian Companies outside India.

Diologic Meanwhile, global financial information provider Diologic in its latest report said that India-targeted M&A volumes reached $11.9 billion through 345 deals so far this year. US was the leading acquiring country with deals worth 1.6 billion dollars, followed by the UK with $904 million and Germany with USD 584 million.

Meanwhile, global financial information provider Diologic in its latest report said that India-targeted M&A volumes reached $11.9 billion through 345 deals so far this year. US was the leading acquiring country with deals worth 1.6 billion dollars, followed by the UK with $904 million and Germany with USD 584 million.

Some Facts Between 1926 and 1930- there were 4600 mergers took place Result of which between 1919 and 1930 12,000 companies went out of market. The second wave came to an end when stock market crashed on October 29,1929. Investment Bankers played in the first two phases of mergers.

Between 1926 and 1930- there were 4600 mergers took place

Result of which between 1919 and 1930 12,000 companies went out of market.

The second wave came to an end when stock market crashed on October 29,1929.

Investment Bankers played in the first two phases of mergers.

1965-69 in USA Management principles were applied in industries. Management graduates were employed to manage conglomerate mergers. There were 6000 mergers which leads to 25000 firms disappeared. Investment Bankers do not finance most of these mergers Finance:-????

Management principles were applied in industries.

Management graduates were employed to manage conglomerate mergers.

There were 6000 mergers which leads to 25000 firms disappeared.

Investment Bankers do not finance most of these mergers

Finance:-????

Equity financing

Equity financing

EXERCISE COMPANY A NO. OF SHARES 2 LACS MARKET VALUE PER SHARE RS.25 EPS RS.3.125 COMPANY B NO. OF SHARES 1 LAC MARKET VALUE RS.18.75 EPS RS.2.5

COMPANY A

NO. OF SHARES 2 LACS

MARKET VALUE PER SHARE RS.25

EPS RS.3.125

COMPANY B

NO. OF SHARES 1 LAC

MARKET VALUE RS.18.75

EPS RS.2.5

PRICE EARNING RATIO APPROACH MEANING COMPUTATION : P/E RATIO = MP/EPS EPS = EAT/NO. OF EQUITY SHARES MARKET PRICE = P/E (NO. OF TIMES) * EPS

MEANING

COMPUTATION :

P/E RATIO = MP/EPS

EPS = EAT/NO. OF EQUITY SHARES

MARKET PRICE = P/E (NO. OF TIMES) * EPS

EXAMPLE 7.5 8 P/E RATIO(TIMES) 18,75,000 50,00,000 TOTAL MARKET VALUE (N*MPS) OR (EAT*P/E RATIO) 18.75 25 MARKET PRICE PER SHARE(MPS) 2.5 3.125 EPS 1,00,000 2,00,000 NO. OF SHARES 2,50,000 6,25,000 EAT FIRM B FIRM A PRE MERGER SITUATION

CONCLUSION IF SHARES ARE EXCHANGED BASED ON CURRENT MARKET PRICE PER SHARE , POST MARKET PRICE SHARE INCREASED AT HIGHER RATE THAN EXCHANGED BELOW THIS RATIO Boot strap effect

IF SHARES ARE EXCHANGED BASED ON CURRENT MARKET PRICE PER SHARE , POST MARKET PRICE SHARE INCREASED AT HIGHER RATE THAN EXCHANGED BELOW THIS RATIO

Boot strap effect

MARKET VALUE AFTER MERGER = MARKET VALUE BEFORE MERGER = 68,75,000 NET GAIN = 15,00,000 ? IF EXCHANGE RATIO IS 2.5:1 WHO GAINS WHO LOSES ? IF EXCHANGE RATIO IS 1:1 WHO GAINS WHO LOSES ? HOW TO CALCULATE TOLERABLE SHARE EXCHANGE RATIO

MARKET VALUE AFTER MERGER = MARKET VALUE BEFORE MERGER = 68,75,000

NET GAIN = 15,00,000

? IF EXCHANGE RATIO IS 2.5:1 WHO GAINS WHO LOSES

? IF EXCHANGE RATIO IS 1:1 WHO GAINS WHO LOSES

? HOW TO CALCULATE TOLERABLE SHARE EXCHANGE RATIO

DETERMINATION OF TOLERABLE SHARE EXCHANGE RATIO 75,00,000 10,00,000 TOTAL MV LESS: MINIMUM TO BE GIVEN TO B 1,00,000 NO. OF SHARES OF A TO A CO. SHARE HOLDERS 65,00,000 NET BENEFIT TO A 10,00,000/65 = 15,385 SHARES NO. OF EQUTY SHARES TO BE ISSUED BASED ON DESIRED MARKET PRICE 50,000/15385 = 3.25 SHARES OF FIRM B, 1 SHARE IN FIRM A 1:3.25 TOLERANCE SHARE EXCHANGE RATIO 65 PER SHARE DESIRED POST MERGER MPS

CONCLUSION FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES MARKET VALUE AFTER MERGER

FIRM WITH HIGHER P/E RATIO CAN ACQUIRE FIRM WITH LOWER P/E RATIO WHICH WILL INVARIABLY INCREASES MARKET VALUE AFTER MERGER

7.5 8 P/E RATIO (ASSUMED TO BE THE SAME) 21.825 3.125*8=25 MPS 65,47,500 70,00,000 TOTAL MARKET VALUE 8,75,000/3,00,000=2.91/ 8.75/2.8=3.125 EPS 2,00,000+1,00,000=3,00,000 2.8 lakhs NO. OF SHARES 8,75,000 6.25+2.5=8.75 EAT(COMBINED FIRM) 1 : 1 2.5:3.125=.8 EXCHANE RATIO/ SWAP RATIO (ASSUMING) SITUATION 2 SITUATION 1 (BASED ON CURRENT MARKET PRICE POST MERGER

ACCOUNTING FOR AMALGAMATION POOLING INTEREST METHOD CONDITIONS AS PER AS 14: ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO. AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS SHOULD BE SHAREHOLDERS OF NEW CO. PURCHACE CONSIDERATION TO BE SETTLED BY THE NEW CO. THE BUSINESS OF NEW CO. SHOULD CONTINUE NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR CO.

POOLING INTEREST METHOD

CONDITIONS AS PER AS 14:

ALL ASSETS AND LIABILITIES OF TRANSFEROR CO. TO BE THE ASSETS OF THE TRANSFREE CO.

AT LEAST 90% OF F.V OF EQUITY SHARE HOLDERS SHOULD BE SHAREHOLDERS OF NEW CO.

PURCHACE CONSIDERATION TO BE SETTLED BY THE NEW CO.

THE BUSINESS OF NEW CO. SHOULD CONTINUE

NO ADJUSTMENT IS INTENDED TO BE MADE TO BOOK VALUE OF ASSETS AND LIABILITIES OF TRANSFEROR CO.

Life Education Abraham Lincolin

Abraham Lincolin

Thank You All.

Pricing of Capital issues Step-I Total assets Less: Preference Capital Secured and unsecured borrowings Current liabilities Contingent liabilities --------------------------------------------------- A.Net Worth ---------------------------------------------------

Step-I

Total assets

Less: Preference Capital

Secured and unsecured borrowings

Current liabilities

Contingent liabilities

---------------------------------------------------

A.Net Worth

---------------------------------------------------

Method II(Liability Approach) Equity Share capital Add: Free reserves ------------------------------- Less:- Contingent Liabilities --------------------------------------------- Net worth --------------------------------------------

Equity Share capital

Add: Free reserves

-------------------------------

Less:-

Contingent Liabilities

---------------------------------------------

Net worth

--------------------------------------------

2.Profit Earning Capacity Value-PECV Weighted Adjusted Average Profit before Tax Less: Provision for Tax at % ------------------------------------------------ Weighted average profit after Tax Less : Preference dividend ---------------------------------------------- Net profit after Tax and dividend Number of Equity shares including Fresh and bonus shares ------------------------------------------------------------------------- EPS PECV= Capitalisation of Profit at 15%/12%/10%/8% respectively = Net Profit After tax and dividend*100/15

Weighted Adjusted Average Profit before Tax

Less: Provision for Tax at %

------------------------------------------------

Weighted average profit after Tax

Less : Preference dividend

----------------------------------------------

Net profit after Tax and dividend

Number of Equity shares including Fresh and bonus shares

-------------------------------------------------------------------------

EPS

PECV= Capitalisation of Profit at 15%/12%/10%/8% respectively

= Net Profit After tax and dividend*100/15

3.Fair value (Net Asset value +Profit Earning Capacity Value)/2

(Net Asset value +Profit Earning Capacity Value)/2

4.Average Market Price Year I High Low Average Year II Year (Current Year) 4. Monthwise: 1 2 3 4 etc for 12 months (Average market price for the three years)

Year I High Low Average

Year II

Year (Current Year)

4. Monthwise: 1

2

3

4 etc for 12 months

(Average market price for the three years)

5. Capitalisation rate If MV not more than 20% of FV-15% If MV more than 20%-50% -12% Between 51-75 - 10% Above 75% - 8%

If MV not more than 20% of FV-15%

If MV more than 20%-50% -12%

Between 51-75 - 10%

Above 75% - 8%

PE- Multiple Average P/E ratio of related companies are Considered to discount

Average P/E ratio of related companies are

Considered to discount